Investment Banking Vs. Brokerage

The Difference Between Investment Banking Vs. Brokerage

The activity of banks on the stock market is multifaceted. This article will analyze the common aspects of investment banking and brokerage activities to understand their difference. 

Types of banking operations with securities

Commercial banks are one of the participants in the stock market, which, depending on the goal, determines an effective type of activity and decides whether to carry out emission, investment, brokerage activities, buy, sell and store securities or conduct other operations with them. The objectives of the procedures carried out by the bank with it are:

  • attracting additional financial resources for traditional credit and settlement activities based on the issue of securities;
  • profit from own investments in securities due to interest and dividends paid to the bank and growth in the market value of securities;
  • profit from providing services to clients in transactions with securities;
  • competitive expansion of the bank’s sphere of influence and attraction of new clientele through participation in the capital of enterprises and organizations;
  • access to scarce resources through those securities that give such a right and the owner of which is the bank;
  • maintaining the necessary liquidity reserve while ensuring the profitability of investments in the bank’s liquid funds.

The essence of the investment banking 

Today, in a market economy, the basis for the survival and success of a commercial bank is its competitiveness. For this reason, most commercial banks are actively engaged in investment activities and invest their funds in various investment objects, including financial markets. Banks use borrowed rather than their resources for investment, so they rarely risk customer funds by directing them to unverified investment projects without guarantees. Investment is not only an internal affair of the bank itself, and banking supervisory authorities regulate it.

Investments are targeted bank deposits, cash, shares, shares, and many other securities, loans, technologies, and equipment invested in business or other activities for profit. When implementing investment activities and creating an investment portfolio, the main goal is to make a profit while carrying out operations within an acceptable level of risk. Depending on the objects of capital investment, investments can be real and financial.  

The investment activity of banks can be viewed as a business of providing two types of services:

  • cash growth through the issuance or placement of securities in their primary market; 
  • connection of sellers and buyers of securities in the secondary market as a broker or dealer.

 Funds can be invested in real economic assets or financial assets.

What is brokerage?

Brokerage activity in the securities market is a service for executing securities purchase and sale transactions on behalf of clients. The investor – the broker’s client – independently makes an investment decision on the purchase or sale of securities. This transaction is completed at his expense and all the risks associated with making the wrong investment decision lie on him. The broker’s task is to bring the client’s order to the market and execute it at the best price. Then the broker must report to the client about the execution or impossibility of executing this order.

The broker is obliged to fulfill clients’ orders in good faith and in the order in which they are received, without establishing any preferential conditions for some clients to the detriment of others. Transactions carried out on behalf of clients are subject to priority execution compared to dealer operations of the broker himself when he combines the activities of a broker and a dealer.

Currently, Internet trading and electronic document management are the most promising area of work for a broker in the securities market.


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